To regulate or not to regulate?

The forex market has existed as long as currencies, without regulation getting in the way, so why introduce it now? A few obvious reasons present themselves.

Human nature being what it is, companies and individuals need to be protected from those few rotten apples that risk tarnishing the whole industry's reputation. Look at trading scandals at RBC and NAB, or the carnage at Refco.

However, the authorities need to ask whether regulation of the FX market in itself would actually have prevented these incidents. It is regulation of financial institutions as a whole that polices individuals and companies in the market. NAB was given a hefty fine by the Australia Securities and Investments Commission, and Britain's Financial Services Authority (FSA) was also understood to have been involved in scrutinising those involved.

Indeed, there is an argument that unregulated markets are actually experiencing more stringent punishments than those that are heavily regulated. Just look at the FSA's zealous treatment of Citigroup when it fined the bank £14 million for disrupting trading euro bonds on the MTS platform last August. This was the largest fine ever handed out by the UK regulator, and arguably there was nothing actually illegitimate about the unregulated trades.

There is also the problem of the practicality of regulating a truly global market. With so many jurisdictions involved, having binding rules that govern both sides of trades would be fiendishly complicated to enforce.

On the whole, the current regime works well. The recently updated NIPs Code governing London's trading rooms gives a comprehensive and now much more accessible guide to best practice (see page 2). The New York Stock Exchange's FX Committee also has useful guidelines on its website called '60 Best Practices'.

On the whole, the industry seems to do a good job of regulating itself. If there was anything seriously wrong with the system, the market would not be growing at the rapid pace it has been over the past few years.